Car, Home Buyers Could Benefit from Fed Rate Cut

WASHINGTON (AP) - Consumers trying to buy a house or finance acar loan could be the big winners as a result of the FederalReserve's decision to slash its target interest rate to nearly zeroand take other steps to battle the financial crisis and worseningrecession. But analysts caution that any upturn in the economy is stillmonths away. The Fed on Tuesday announced that it was reducing its target forthe federal funds rate to between zero and 0.25 percent, down from1 percent, a level that was already the lowest target rate in ahalf century. And the central bank pledged to use "all available tools" tofight the current downturn. It said it was likely that rates wouldbe kept at "exceptionally low levels" for some time to come. "The Fed has taken some very historic steps and for the firsttime since this crisis began, they have gotten ahead ofexpectations instead of trailing behind them," said Mark Zandi,chief economist at Moody's Economy.com. The Fed's announcement sparked a big rally Tuesday on WallStreet, with the Dow Jones industrial average jumping 360 points,or 4 percent, as investors were pleasantly surprised by the Fed'sresolve to aggressively attack the country's economic woes. In Asia, markets climbed higher Wednesday. Japan's Nikkei 225stock average rose 44.50 points, or 0.5 percent, to 8,612.52 afterinitially rising 1.1 percent, and Hong Kong's Hang Seng Index rose2.2 percent to 15,460.52. Meanwhile, the Commerce Department on Wednesday reported thatthe deficit in the broadest measure of American trade fell morethan expected in the third quarter as an export boom helped offsetan increase in oil imports. The current account trade deficit, which represents the amountof money the U.S. is borrowing from foreigners, fell by 3.7 percentto $174.1 billion in the July-September quarter. That was a bettershowing than economists expected, and the deficit is likely tocontinue falling as the U.S. recession lowers demand for foreigngoods. Economists cautioned that even with the Fed's bold moves it willtake months for the economy to stabilize given that it isconfronting the worst financial crisis since the Great Depressionand a yearlong recession that is already the longest in aquarter-century. The news on the economy is expected to get worse before it getsbetter. Businesses, which have already cut nearly 2 million jobssince January, keep laying off workers in the face of slumpingdemand. The government reported Tuesday before the Fed rate announcementthat home builders slashed production in November by 18.9 percent,the biggest drop in nearly a quarter century, pushing activity downto a record low annual rate of 625,000 units as the woes inhousing, where the current economic troubles began, showed no signsof abating. Economists were optimistic that the central bank's moves Tuesdayto cut interest rates and pledge other efforts to unfreeze frozencredit markets will translate into significantly lower interestrates for consumers. Commercial banks responded immediately to the Fed announcementby cutting their prime lending rate, the benchmark rate formillions of consumer and business loans, by three-fourths of apercentage point to 3.25 percent, pushing it to the lowest point inmore than a half century. Home mortgages, rates on consumer credit cards, auto loans andstudent loans were also expected to decline in the weeks aheadbased on the Fed's commitment to use "all available tools" tomake credit more available. The Fed in the weeks since the credit crisis struck with forcein September has rolled out a number of new programs to greatlyexpand its own lending programs, promising to provide up to $600billion to purchase debt issued or guaranteed by Fannie Mae,Freddie Mac and other government-backed mortgage companies. The Fed has also pledged to lend up to $200 billion to supportsecurities backed by credit card loans, car loans and studentloans, all in an effort to get those markets functioning morenormally. In its statement, the Fed pledged to keep working to get creditinto the economy through these programs and additional programs ifneeded. It specifically mentioned the purchase of longer-termTreasury securities. The Fed's massive expansions of its loanprograms have already pushed its balance sheet of loans from $900billion in September to $2.2 trillion currently. The new pledges had an immediate impact on bond markets wherethe possibility of heavy purchases by the central bank sent yieldson Treasury securities falling sharply. "The Fed has decided to flood the economy with money in thehopes that it will be lent and spent," said Sung Won Sohn, aneconomist at the Martin Smith School of Business at CaliforniaState University, Channel Islands. Sohn predicted that 30-year mortgage rates, which have alreadyfallen a full percentage point since late October to now stand at5.47 percent, could drop by another percentage point in comingweeks to around 4.5 percent. He predicted that rates on auto loansand credit card debt would also come down. "The bottom line is that confidence has deteriorated to such anextent that the Fed is willing to take these extraordinary steps,"Sohn said. But Sohn and other analysts still look for the recession to lastuntil next summer. The overall economy as measured by the grossdomestic product shrank at an annual rate of 0.5 percent in thethird quarter and many analysts believe it will be a much moresevere downturn of around 6 percent in the current quarter withcontinued GDP declines in the first and second quarters of nextyear. If the recession ends next June, as some economists areforecasting, it will have lasted 18 months, making it the longestdownturn since the Great Depression. Businesses cut more than a half-million jobs in November alone,pushing the unemployment rate to a 15-year high of 6.7 percent.Many analysts believe that unemployment will surpass 8 percent bylate next year before an economic recovery has picked up enoughsteam to stabilize employment. The weak economy is helping to keep a lid on prices. Thegovernment reported Tuesday that consumer prices fell by a record1.7 percent in November as gasoline and other energy pricescontinued to plunge. The Fed noted that "inflation pressures havediminished appreciably," a development that gives the central bankmaneuvering room to focus on boosting growth.

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